The Financial Genius of Amazon.com

In July of 2016, I wrote an article called “Spend It If You Got It”. In the article, I detailed a crucial truth about how money works in our new economy.

In an economy where almost everything is built to take your money, saving it is of little value. From inflation to taxes to hidden fees in your 401(k), the system is stacked against you.

In today’s economy, spenders are winners. By this I mean people who know how to spend their money in the right places and in the right investments.

The basic premise was a familiar one for Rich Dad readers: savers are losers; spenders are winners.

The usual reactions came from those who run into financial advice that challenges their preconceptions. To those who are raised on the old rules of money—go to college, save money, buy a home, and invest in stocks, bonds, and mutual funds—the idea that spending money was the way to build wealth was crazy talk.

How the middle class spends money

Of course, the problem starts at a fundamental difference between what I mean by spending and what most people mean by the same word.

For most people, spending simply means buying goods like clothes, televisions, cars, vacations, and more. On top of this are other more necessary expenses such as food, a mortgage, and medical services. That is why most people’s financial statements look like this:

This is the cash flow pattern of the middle class. They go to work, collect a paycheck, buy liabilities like a house (yes, it’s not an asset), and spend their money on other expenses. Generally they live paycheck to paycheck.

To those that hold this definition of spending and argue that savers, not spenders, are winners are correct.

But that’s not what I mean by spending.

How the rich spend money

The rich understand that money does them no good when it simply sits. Because money is a currency, it is most powerful when it is moving, just like an electric current. If money sits still, it stagnates rather than makes more money. In fact, it loses value. The rich understand that the key to making more money is putting your existing money to work—to move it.

That is why the financial statement of a rich person looks like this:

The rich buy cash-flowing assets that create passive income. They then use that income to buy even more assets that generate even more passive income. For the rich, spending means treating investing like and expense—and making it your most important expense.

Amazon acts like a rich person

As I write this, Amazon is making big waves in the headlines with their acquisition of the high-end, organic grocer Whole Foods. The company, which started as a bookseller in the Seattle garage of Jeff Bezos, is paying $13.7 billion for the chain.

This isn’t the only acquisition that Amazon has made. As you can see, since 1998, the company has acquired 76 companies, spending billions of dollars in the process. And most recently, they were rumored to be in talks to purchase the chat application Slack for $9 billion.

Amazon has often been ridiculed for “not being profitable.” By this people meant that they didn’t post positive net income. But as Recode points out, “to know Jeff Bezos’s priorities is to know that he cares more about cash flow than net income.”

Now take a look at this chart from another Recode article by Rani Molla and Jason Del Rey:

As you can see, Amazon’s lack of net income isn’t due to poor business practices or a poor business plan. Rather, it’s due to reinvestment of cash into new investments. As Molla and Del Rey write, “But isn’t a business’s goal to turn a profit? Not at Amazon, at least in the traditional sense. Jeff Bezos knows that operating cash flow gives the company the money it needs to invest in all the things that keep it ahead of its competitors, and recover from flops like the Fire Phone. Up and to the right.”

This is no different than how the rich spend their money, constantly acquiring new assets that produce greater cash flow in order to buy more assets. The chart speaks for itself, and as you can see, the growth is exponential.

As a result, Amazon has gone from a $438 million valuation at its IPO in 1997 to a $460 billion valuation today—all without being “profitable”.

You can spend like the rich

The reason Amazon is so wildly successful—and rich—is because it practices a different kind of discipline when it comes to money. Yes, it does take discipline to save money, but it takes even greater discipline to spend it on assets and to do so intelligently.

Many years ago, when Kim and I were first starting out as a couple, we made a decision to be disciplined like Bezos and Amazon are. This meant that we made investing our first and most important expense.

At the time we didn’t have much money, and honestly, we didn’t have enough to pay our bills and invest. Yet, we instructed our bookkeeper to pay our investment expenses first anyway.

She hooted and hollered, saying we had to pay our bills. But we remained steadfast, always paying our investment expenses first. Then we sat down and figured out how to pay our bills. Sometimes this meant picking up a side job, other times it meant negotiating with the people we owed money to. In the end, it all worked out. We invested and we paid our bills—even if it was sometimes a bit late.

That decision allowed us to act like Amazon. And over the years, our cash flow has gone up and up to the right, just like Amazon’s.

The good news is that anyone can do this—even you. All it takes is two simple things: the belief that spenders are winners and the discipline to act.